A few days ago, the international financial markets were reminded of the collapse of the US bank Lehman Brothers in 2008. That collapse is said to have caused the international financial crisis, that was followed by a recession, thanks to the credit crunch with a number of bank bailouts, that was in turn followed by the sovereign debt crisis and country bailouts, that caused another spate of negative growth.
So what has changed since then? Have we learnt the lessons from that experience? Is the financial world a safer place?
Many fear that nothing has really changed. The public was promised that bankers who abused of the system would be punished and that banks would be reformed. It was also promised that public sector finances would be rebalanced, deficits would be closed and debts would be reduced. One really doubts how much of this has happened.
We have not really had any serious financial reform as banks have sought to neutralised the reform agenda.
It is not true that the persons in senior management at banks and other companies have suffered the most. Once again it has been employees that suffered the brunt
We need to start with who has suffered most during this crisis period. It is not true that the persons in senior management at banks and other companies have suffered the most.
Once again it has been employees that suffered the brunt and those that suffered most were the lower grade employees. They have been hit in more ways than one. As pressure mounted on senior executives to ensure levels of profitability, they have cut down costs. All too often, the costs they cut were wages and salaries. So employees have had to accept a reduction in their earnings or lose their job.
Something similar happened with public sector expenditure. As governments were forced to reduce expenditure or raise revenue to balance their budgets, employees and those most vulnerable in society foot the bill.
Public services were cut down. Those on a salary paid their taxes in full while self-employed and professionals could find a way of containing what they paid in tax.
Increases in VAT hit everyone equally, so those who earn less are affected the worst. We also had persons who lost their life’s savings with the collapse of banks and investment schemes and with the haircut that depositors in some countries had to accept. Thus the gap between the richest and poorest in society has grown, which is not much different from what has been happening in the years before the crisis.
The other big element of the crisis was banking reform. The UK is probably alone in seeking to separate investment banking from retail banking and the target date for implementing it seems to getting delayed. Everywhere else, the old model remains intact and unchallenged. Banks are still considered “too big to fail”.
So when the next crisis comes and we have to choose between bailing out a bank or letting a bank fail, the outcome will still be the same – the taxpayer will bail out the bank.
Two of the fundamental causes of the 2008 crisis were too much debt and an asset bubble.
In western economies, debt is being curtailed. However, the growth of debt in China is such that it is becoming even more significant than the level of debt in the US and Europe in 2008.
With regard to the asset bubble, there are already signs that following 2008 we are moving towards the next one. The rise in the price of properties in major commercial centres is indicative of this.
So have we let an opportunity slip by without really addressing the core economic issues?
The Lehman collapse and subsequent events may not have had as severe an impact in Malta as in other countries.
This is not to be taken for granted as next time round (and there will be a next time) we may be swamped. This means that Malta also needs to draw its lessons from the Lehman crisis and act wisely.
We always need to remember that we are in this all together, and need to act as one nation.